Google's Internet access scheme is a very long-term play, but an ambitious one

On the heels of talk about a $45 billion merger deal between telecom giants Comcast (CMCSA) and Time Warner Cable (TWC), the timing is perfect. Consumer advocates are worried that a lack of competition under a combined Comcast-TWC would lead to increases prices — not just for cable television service, but for Internet access.

But regardless of whether Google Fiber expansion plans are good for consumers, is the move good for GOOG stock?

There are clearly risks — chief among them, the fact that Google is spending big bucks on fiber optic cables and maintaining a terrestrial telecommunications network in an era where mobile is all the rage.

On the whole, however, this could be one of those moments where investors, consumers and businesses alike are awed by the vision of the innovators running Google … presuming things go as planned.

Google Fiber: Costs and Benefits

The costs of installing fiber optic cables into 34 cities is huge. Bernstein Research estimates the total price tag of up to $3 billion.

However, Bernstein analyst Carlos Kirjner notes that the effort could cost much less than that because there’s no guarantee all 34 cities will be right in the end for Google Fiber — or that incumbent providers like Comcast or Verizon (VZ) won’t upgrade their own service to make the market tougher for GOOG to break into.

Google just spent $2.26 billion in capex in the fourth quarter, so while this is a big number, it’s not wildly out of the norm. And with $59 billion in cash and short-term investments, GOOG has plenty of money to spend on Google Fiber.

In short, while the costs are big in some respects, they are small relative to what Google can do.

As for the benefits, the short-term returns are bound to be pretty negligible. GOOG is offering TV and Internet access for $120 a month, and it will take a year or so of subscriptions to offset the construction costs and service/content costs associated with the effort.

But long-term, the disruption potential is big. High-speed Internet could become an annuity business for Google that delivers consistent and reliable cash flow once the business hits critical mass. There is always a risk of overreaching, as has happened in some regions with Verizon FiOS fiber optic communications or the similar U-verse effort from AT&T (T) that saw costly build-outs beyond true demand. But if Google succeeds, it could lock up customers for decades — and seriously disrupt the incumbents, both by leeching subscribers and by forcing them to upgrade their own networks or cut costs.

The Bottom Line for GOOG

In short, I don’t think Google Fiber will do anything in the near term for Google. But with all that cash sitting around, it’s nice to see the company thinking big and thinking long term. That’s a squishy thing, but ultimately a vote of confidence if you’re a GOOG stock investor.

I also think in the short term, nothing will happen to competitors like Comcast or Verizon. They are too entrenched to miss a few markets right now.

But longer term, Google has big upside potential, and the disruption risk is real for competitors.

There’s no need to trade on this news now. But if you’re a long-term investor in VZ stock, for instance, the idea of Google stealing customers from no-growth domestic telecoms should be one you keep in the back of your mind going forward. Because even if GOOG doesn’t blow the doors off or move beyond 34 cities, the damage to a stock like Comcast or Verizon could be real.

At a Glance

There's no need to trade on this news now. But if you're a long-term investor in VZ stock, for instance, the idea of Google stealing customers from no-growth domestic telecoms should be one you keep in the back of your mind going forward. Because even if GOOG doesn't blow the doors off or move beyond 34 cities, the damage to a stock like Comcast or Verizon could be real.